Optimal Currency Areas with Labor Market Frictions

88 Pages Posted: 21 Feb 2019 Last revised: 26 Feb 2020

See all articles by Rohan Kekre

Rohan Kekre

University of Chicago - Booth School of Business

Date Written: February 20, 2020

Abstract

I study efficiency and optimal monetary policy in a two-country monetary union with frictional labor markets. With heterogeneity in labor market frictions, the constrained efficient allocation generically cannot be achieved even if productivity shocks affecting each country are the same. The second-best optimal policy targets smaller in inflation and output gaps in the more sclerotic labor market. A quantitative calibration to the Eurozone implies welfare gains from redefining the union's inflation target to put more weight on its sclerotic members.

Keywords: Optimal Currency Areas, monetary policy, search and matching

JEL Classification: E52, F45, J63

Suggested Citation

Kekre, Rohan, Optimal Currency Areas with Labor Market Frictions (February 20, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-14, Available at SSRN: https://ssrn.com/abstract=3333339 or http://dx.doi.org/10.2139/ssrn.3333339

Rohan Kekre (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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